Politics & Policy

Trading Down

Taxing decisions.

This week, the House of Representatives will consider expanding the federal program for workers who lose their jobs, or whose jobs move offshore, due to competition from imports. But Trade Adjustment Assistance is increasingly a relic of the past, and Congress should end the program altogether.

Today, only one in 30 unemployed workers can point to import competition or offshoring as the cause of their predicament. The Council of Economic Advisers estimates that these factors are responsible for less than three percent of “mass layoffs” (those of more than 50 people). Changes in technology and consumers’ tastes, domestic competition, and simple business failure are much more common reasons for changes in industries’ (and workers’) fortunes. It is grossly unfair to single out a group of workers as deserving of special assistance.

The arrangement reflects a different economy in a different political setting. Through much of the post-war era of trade liberalization, organized labor and free-traders struck a grand bargain: negotiated trade agreements that lowered tariffs in the United States would be accompanied by extra welfare benefits for people who lost their jobs because of import competition. Initiated by President John F. Kennedy in 1962 as a way of building domestic support for multilateral trade negotiations, the program has undergone changes through the years, but expansions in 2002 saw costs more than double, to nearly $1 billion in fiscal year 2006.

That’s peanuts, say advocates of the program, compared to the benefits enjoyed by the American economy as a whole from trade liberalization. This is true. Research by the Peterson Institute for International Economics shows that the U.S. economy gains approximately $1 trillion annually as a result of lower trade barriers. We could well afford to compensate those relatively few Americans who lose more than they gain from lower trade barriers. Trade adjustment assistance — a package of cash benefits, training programs, health-insurance rebates, relocation assistance, and, for older workers, wage insurance — is designed to do just that.

But trade adjustment assistance no longer buys public support for trade liberalization. This is partly a function of the visible costs and diffuse benefits of freer trade: The lost jobs are a highly visible reminder that it does not make economic sense to produce everything in America, even though lower prices and more choice for consumers make trade a net positive for the economy overall. The general public — and politicians — take notice when a factory closes, but not so much when they benefit by the individually small (but cumulatively large) price cuts on importable goods. As a consequence, Americans are skeptical of the benefits of trade, and are growing more so. A new survey from the Pew Global Attitudes Project shows that support for trade has decreased sharply in the United States: only 59 percent of Americans say that trade is good for the country, compared to 78 percent in 2002.

Unions, never particularly enthusiastic about trade liberalization, are flexing their muscle to increase TAA funding, even as they oppose new trade agreements. In a recent letter to lawmakers outlining its concerns about the recently passed preferential trade agreement between the United States and Peru, the AFL-CIO widened its list of concerns beyond labor and environmental demands (already agreed to by the administration) to include government procurement, investment rules and other areas not traditionally associated with the labor movement’s key mission. Their opposition to the pending trade agreements with Colombia and South Korea is even more strident.

The new Democratic majority is pushing ahead with TAA, however, as if the grand bargain was still intact and there were something still to be gained from expanding TAA. The House Ways and Means Committee is reportedly discussing a draft reform which would surely expand the program substantially. Congressmen in the House and Senate propose paying for increased wage insurance with an income surtax, expanding the coverage to include service workers and workers affected by trade with countries with whom the United States does not have formal trade agreements (read: India and China). In short, there is a movement to spend more taxpayers’ money on a select subgroup on unemployed workers. In view of the numbers, the moral rationale for this sort of welfare is dubious at best.

Trade barriers are a tax on the many to benefit the protected few. It is grossly unfair to ask taxpayers to pay for extra welfare for “special” unemployed workers when those trade barriers are at long last removed. With substantial trade liberalization looking unlikely, Congress has even less of a reason to extend — let alone expand — TAA.

 – Sallie James is a policy analyst at the Cato Institute’s Center for Trade Policy Studies.


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